A new note from market research firm Canaccord Genuity paradoxically finds that Apple and Samsung together captured 108 percent of the profit from the world smartphone market during the second quarter of 2012. How is that possible? It’s not just that Samsung and (particularly) Apple have been adept at locking in profits from worldwide consumers’ interest in smartphones — it’s that nearly all the other smartphone makers are losing money. So much, that those losses are effectively putting money into Apple’s and Samsung’s pockets.

The smartphone market continues to experience dramatic growth. How did just two companies seemingly get a lock on all the money to be made making the devices?

Profit breakdown

According to Canaccord Genuity, Apple accounted for a mere 6.5 percent of the global handset market — and 16.1 percent of the smartphone market — but managed to rake in some 71 percent of the profit from smartphones. Samsung had the largest share of the smartphone market, accounting for one in four of the smartphones sold during the second quarter of the year. And, similarly, Samsung is capturing a good deal of money: 37 percent of the profits in the smartphone market. These figures are bolstered by operating losses posted by the likes of Motorola, Sony, Research in Motion, and Nokia, each of which have seen their shares of the smartphone market slide — and smartphone revenues sliding with them.

That said, Apple and Samsung weren’t the only smartphone makers to see a profit in the second quarter. HTC also finished the quarter in the black; although its recent HTC One doesn’t seem to have resonated strongly with consumers, it still enjoys broad carrier support around the world.

The second-quarter numbers represent an improvement for Samsung, with the introduction of the Galaxy S III smartphone continuing to bolster its sales. At the same time, Apple is actually seeing the iPhone juggernaut slow down a bit. While iPhone sales in the first quarter accounted for 22.4 percent of smartphones, that dropped in the second quarter to 16.1 percent. The second calendar quarter of the year is traditionally slow for phones and consumer electronics, and many customers are reportedly putting off purchases of a new iPhone as they wait for Apple to announce a successor to the iPhone 4S — a move Apple seems likely to make in September.

Claiming two companies account for more than 100 percent of profits in an industry seems outlandish, but Canaccord Genuity is consistent: Last May the firm asserted the two companies accounted for 99 percent of smartphone profits. Other sources agree. Raymond James analyst Tavis McCourt goes even further, claiming Apple accounted for just 6 percent of smartphone sales during the quarter, but captured 77 percent of smartphone profits.

How they’re doing it

Apple and Samsung represent two substantially different approaches to winning the smartphone market. Apple is making the most money, while Samsung is shipping the most phones.

Apple’s strategy revolves around the notoriously high subsidies it charges carriers to offer the iPhone. Of course, the precise terms of Apple’s contracts with carriers have not been disclosed, but industry estimates have carriers paying Apple a $425 to $500 subsidy per iPhone, with the total cost of the device to carriers being around $625. That’s about 40 percent higher than comparable smartphones from other manufacturers. Carriers might pay a $300 subsidy (out of $500 total) for a high-end smartphone from the likes of Samsung, HTC, or Motorola. Filings released as part of Apple’s high-profile patent infringement case with Samsung seem to reveal that Apple pulled in margins of 49 to 58 percent on iPhone sales from the two years running from April 2010 through March 2012 — an astonishing figure.

Apple can get away with those high carrier subsidies — and continue to rake in those high margins — because consumer demand for the iPhone remains phenomenally strong. During the first quarter of 2012 the iPhone accounted for over half of Verizon Wireless’s smartphone sales. At AT&T — Apple’s longest-standing carrier partner for the iPhone — the results were even more one-sided for the first quarter: AT&T sold 5.5 million smartphones, and fully 78 percent of them were iPhones.

Apple will continue to be in the drivers’ seat on iPhone revenue for a while. Its contracts with major U.S. carriers aren’t due to expire soon, and right now a major carrier literally can’t afford to be without the iPhone — just ask T-Mobile how well that has been working out for them. Carriers might be paying through the nose up front for the iPhone, but they’re also making money hand over fist across the length of those two-year contracts. An iPhone might cost a carrier $625 (including subsidy) up front, but the revenue from a two-year contract ranges from over $1,500 (on the very low end) to almost $4,500 on the high end — and those figures were before AT&T and Verizon announced shared data plans, which will increase the cost of owning a smartphone for many people.

Samsung’s road to smartphone profits relies on tried-and-true business principles: Make your product available in as many channels as possible and rely on sheer volume of sales to turn a profit. So far, Samsung is the only Android device maker that has truly made this strategy work for it. Whereas Apple launched the iPhone in the U.S. with only a single carrier partner (AT&T), Samsung launched versions of its initial Galaxy S line on all major carriers, including U.S. regional carriers. Samsung also pursued its Galaxy-everywhere strategy markets around the world. Meanwhile, the iPhone is still limited to a single (or a handful) of carriers in some markets, Samsung is more than happy to let virtually anybody sell its Galaxy smartphones. Again, Samsung is banking on the cumulative volume of sales, not the margins it makes on every deal.

That said, Samsung’s margins are not insubstantial: Most market watchers put Samsung’s smartphone margins at about 22 to 25 percent. Coupled with an average per-smartphone price of around $425 (with $300 being subsidized), it’s no surprise Samsung is turning a healthy profit.

(It’s worth noting that, unlike Apple, Samsung also has a substantial feature-phone business, with devices wholesaling to carriers from anywhere from $25 to $100 on margins as low as five percent. These are the devices that pushed Samsung over Nokia to make it the largest handset maker on the planet.)

At the end of the day, however, Apple is still winning the race. Samsung may be selling twice as many smartphones as Apple, but Apple’s iPhone is essentially making twice as much money as Samsung’s entire smartphone line — and that’s during a traditionally slow sales season while part of its target market is waiting for the next iPhone. From a business point of view, the bottom line is more important than market share. After all, until very recently Nokia was the largest handset maker on the planet, and sheer market share didn’t prevent the company from falling on hard times. Generating giant piles of cash, however, will keep a company from falling on hard times. More importantly, it gives the company ample resources to continue to innovate its products.

Breaking the cycle

Is the smartphone market doomed to be dominated by the iPhone for another four or five years? Not if carriers and other smartphone makers have anything to say about it.

Carriers — companies like Verizon Wireless and AT&T would love to break the iPhone’s hegemony. They don’t mind paying for the iPhone, they just mind two things. One: paying extra for the iPhone, seeing the high iPhone subsidy as money Apple is taking out of their pockets. Two: Being locked out of the iPhone experience, being unable to brand their iPhones separately from their competitors’ or being able to lock customers into carrier-specific services via preloaded apps and services.

Carriers would love to see marketplace competition force Apple to agree to lower iPhone subsidies, and carriers aren’t afraid to put their fingers on the scales in an effort to tip the market their way. There are numerous reports of carrier retailers and franchises offering salespeople higher commissions on Android devices compared to the the iPhone, and it seems barely a week goes by without reports of sales representatives from major carriers misrepresenting the iPhone and steering customers towards other devices. (Need an example? Designer Jeff Stern outlined recent experience with Verizon Wireless, and Verizon’s response. On the flipside, plenty of customer reps are also inaccurate about Android devices.) Carriers’ efforts don’t stop with boosting Android over the iPhone: They would love to see Windows Phone become a major player in the smartphone space, creating a third ecosystem that could be played against both Android and the iPhone. After all, competition spurs innovation, right?

Market growth — Although the worldwide market for mobile phones is no longer growing quickly, the market for smartphones continues to grow rapidly. During the second quarter of 2012 IDC found that smartphone sales increased 42.1 percent year over year. Although that actually represents lower growth than any quarter since 2009 — IDC attributes that to economic uncertainties, particularly in the Eurozone — that’s still a phenomenally fast growth rate. And potentially, a great opportunity for all smartphone makers. After all, a rising tide lifts all ships. It’s particularly noteworthy that many of these smartphone buyers are not new to mobile phones; instead, they’re upgrading from feature phones. In the United States — one of the world’s most-developed mobile markets — smartphones just recently accounted for half of all new phone sales, according to Nielsen. That means, even in 2012, half off all new phones being sold are still feature phones.

Microsoft and Nokia — That untapped market of feature phone owners who have yet to jump on the smartphone bandwagon probably represents the best bet for breaking the iPhone’s stranglehold on smartphone profits. Microsoft and Nokia are betting on it. The majority of current smartphone owners are locked into either the Apple or Android ecosystem, making it difficult to move to another platform. Doing so entails repurchasing key apps and games for their new platform (assuming those apps and games are event available), as well as the technical hassles of figuring out how to sync contacts, calendars, media, and more. Power users might be willing to try that, but most consumers just want a phone that’s measurably better or more fun than the one they’re currently carrying, with no headaches.

Consumers who still rely on feature phones aren’t locked into any smartphone ecosystem, and have to clear the fewest hurdles to adopting a platform. If Microsoft and Nokia can convince a significant number of those consumers to adopt Windows Phone 8, they might be able to set Windows Phone on the path to being a long-term success, rather than an also-ran alongside the likes of webOS and MeeGo. To make that work, Microsoft (and Nokia) will have to offer Windows Phone 8 devices at price points that don’t make cost-sensitive feature phone owners wince. According to the Financial Times (subscription required) Nokia is even in talks with carriers about exclusive models and revenue sharing agreements in an effort to put Lumia devices in front of as many buyers as possible.

Money talks

The bottom line for Apple’s competitors, however, is that it’s going to take a long time to erode the iPhone’s position in the smartphone market — assuming Apple doesn’t manage to shoot itself in the foot. Apple doesn’t need marketshare dominance to have a healthy smartphone business. At current prices, Apple could account for as little as two percent of the global handset market and still be making more money on smartphones than Samsung.

Apple has no need to race for the bottom on pricing, either. It still has no trouble selling the iPhone 3GS, which it released more than three years ago. When was the last time a smartphone maker could get away with offering a three-year-old phone, or still planned to support it with the next release of it’s mobile operating system? Android devices notoriously lag months behind new releases of the operating system — if they get upgrades at all. Microsoft recently kicked all existing Windows Phone 7 devices to the curb when it revealed none of them — none — would run Windows Phone 8.

From a consumer’s point of view, maybe iPhones cost carriers more, but they often represent a better value — even for cost-sensitive buyers. That’s very difficult to compete with, even for companies the size of Samsung, Google, and Microsoft.